Understand your Lender to secure your funding
Investors often struggle with presenting their investment opportunities. Are they ill-informed or lacking in skill? Of course not. They simply lack the knowledge to present their investment opportunities in a way that ensures them a quick response, and favorable loan terms and conditions.
Lenders are concerned with risk
Real Estate secured lending involves risk. From your lender’s perspective, there are many uncertainties when it comes to underwriting a new commercial mortgage. Some are generalized and perhaps largely out of your control, such as macro economic trends, and broader marketplace dynamics. Some are property specific and are more directly influenced by your involvement, such as property maintenance and upkeep, as well as leasing performance. Others are fully your responsibility, and include you, and your company’s specific credit worthiness and business acumen and experience.
What can you do to positively influence your lender?
-Provide them with details as to why the local marketplace dynamics support your loan request. Market vacancy rate and cap rate information is useful. The specific attributes of your property location is key as well.
-Demonstrate that your property is being managed in a manner which attracts and supports tenancy. Provide a list of recent capital improvements. Underscore your management experience. Have details on your maintenance contracts. These all support the fact that you are acting as a prudent landlord, focused on property stability and value creation.
Lenders are focused on cash flow
Why is your lender so focused on cash flow? Quite simply it forms the basis upon which your property’s value is determined, and its ability, both currently, and on a go-forward basis, to service the requested debt.
Some points to consider:
-Giving your lender your rent roll is often insufficient. It rarely provides as much detail as your lender is looking for.
-Understand whether your leases are structured on a fully net-to-the-landlord basis, a gross basis, or some variation.
-Understand your present vacancy situation, and lease roll-over exposure. What plans are in place to secure ongoing tenancies.
-Understand that future cash flow will service your debt, so stabilize and normalize your property income projections.
Lenders want to know what you plan to use the money for
As simple and straightforward as this may seem, investors often struggle with articulating to their lender precisely the intended use of funds. Not being able to quickly present this information will leave your lender scratching their head.
A tip to consider:
Consider presenting a “sources and uses” table. In simple terms, a ledger listing where the funds are coming from, and on the other column, what the funds will be used for. In the case of a purchase, you may be seeking a 1st mortgage, have already negotiated a VTB 2nd mortgage, and will be providing cash/equity. The bulk of the funding will likely be directed to the vendor, but you will have various due diligence and closing costs as well.
Understanding your lender’s concerns will go a long way to ensure that you obtain the requested financing both quickly, and on competitive terms.
Lenders want to lend you money!
The reality is that Lenders want to lend money. It’s their core business. Making a “spread” on the rate of interest charged on the money they lend, over the rate of interest paid on deposits they hold, is their fundamental business model. All you need to do is provide them with the information they require to enable them to say yes. Understand your Lender to secure your funding.